ADP 2014 Annual Report Download - page 48

If the fair value of an available-for-sale debt security is below its amortized cost, the Company assesses whether it intends to sell the security or if it is more likely
than not the Company will be required to sell the security before recovery. If either of those two conditions are met, the Company would recognize a charge in
earnings equal to the entire difference between the security's amortized cost basis and its fair value. If the Company does not intend to sell a security or it is not
more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is
recognized in earnings, and the amount related to all other factors, which is recognized in accumulated other comprehensive income.
Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective-interest
method. Dividend and interest income are recognized when earned. The Company did not have any impairments of available-for-sale securities in the years ended
June 30, 2015 ("fiscal 2015 "), June 30, 2014 ("fiscal 2014 "), or fiscal 2013 .
F. Fair V alue Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants at the measurement date and is based upon the Company’s principal or most advantageous market for a specific asset or
liability.
U.S. GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:
Level 1 Fair value is determined based upon quoted prices for identical assets or liabilities that are traded in active markets.
Level 2 Fair value is determined based upon inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the asset or liability, including:
· quoted prices for similar assets or liabilities in active markets;
· quoted prices for identical or similar assets or liabilities in markets that are not active;
· inputs other than quoted prices that are observable for the asset or liability; or
· inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Fair value is determined based upon inputs that are unobservable and reflect the Company’s own assumptions about the assumptions that market
participants would use in pricing the asset or liability based upon the best information available in the circumstances (e.g., internally derived assumptions
surrounding the timing and amount of expected cash flows).
Over 99% of the Company's available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service. To determine
the fair value of the Company's Level 2 investments, a variety of inputs are utilized, including benchmark yields, reported trades, non-binding broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The Company reviews the
values generated by the independent pricing service for reasonableness by comparing the valuations received from the independent pricing service to valuations
from at least one other observable source. The Company has not adjusted the prices obtained from the independent pricing service. The Company has no available-
for-sale securities included in L evel 1 and L evel 3.
The Company's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of assets and
liabilities within the fair value hierarchy. In certain instances, the inputs used to measure fair value may meet the definition of more than one level of the fair value
hierarchy. The significant input with the lowest level priority is used to determine the applicable level in the fair value hierarchy.
G. Long-term Receivables. Long-term receivables primarily relate to implementation and transition costs charged to clients acquiring ADP’s products and
services. Unearned income from finance receivables represents the excess of gross receivables over the amount financed. Unearned income is amortized using the
effective-interest method to maintain a constant rate of return over the term of each contract.
Notes receivable aged over 30 days past due are considered delinquent and notes receivable aged over 60 days past due with known collection issues are placed on
non-accrual status. Interest revenue is not recognized on notes receivable while on non-accrual status. Cash payments received on non-accrual receivables are
applied towards the principal. When notes receivable on non-accrual status are again less than 60 days past due, recognition of interest revenue for notes
receivable is resumed.
The allowance for doubtful accounts on long-term receivables is the Company's best estimate of the amount of probable credit losses related to the Company's
existing note receivables.
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